Red Hat earnings exceed Wall Street's expectations

The Red Hat Tower in downtown Raleigh, N.C.
The Red Hat Tower in downtown Raleigh, N.C.

Shares of Red Hat soared as much as 14 percent in after-hours trading after the open source software company reported better-than-expected fiscal third quarter revenue and net income and upped its guidance for the year.

CEO Jim Whitehurst, in a conference call with analysts, credited “continued strong demand and excellent sales execution” for driving a 15 percent jump in revenue to $456 million. Revenue jumped 18 percent after adjusting for currency fluctuations.

Analysts had projected that revenue would total $451 million, according to Bloomberg News.

Whitehurst also noted that the Raleigh-based company has posted 11 consecutive quarters of “of mid-to-high teens revenue growth.”

Net income, after adjusting for stock compensation and amortization expenses, totaled $79 million, or 42 cents per share, compared to $81 million, also 42 cents per share, a year ago. Analysts had projected earnings per share of 40 cents.

The year-ago numbers were boosted by $4 million, or 6 cents per share after adjustments, thanks to a lower tax rate.

Mizuho Securities analyst Abhey Lamba wrote in a research note that “strong large deal activity” boosted Red Hat’s results.

Red Hat set a quarterly record with 12 contracts that exceeded $5 million in the third quarter, thanks in part to customers using multiple products. One-third of the company’s top 30 contracts called for five or more Red Hat products, Whitehurst said.

Red Hat is the dominant open source software company. Its software is available for free; it makes money by charging its business customers for maintenance, support and related services.

The company’s customers “talk about the broad portfolio,” said Charlie Peters, the chief financial officer. “It’s not just an operating system conversation anymore.” Red Hat’s flagship software is an operating system, but today it offers products for a wide variety of applications, including cloud computing, virtualization and data storage.

“There is no doubt that open source is the default choice,” Peters said. “It’s no longer the acceptable alternative. People start there.”

“I actually had a customer say, oh yeah, Red Hat. You don’t get fired for buying Red Hat,” Whitehurst added. “So you know we must be going mainstream.”

The company also increased its guidance for the third time this fiscal year.

It boosted its projection for earnings per share for the fiscal year to between $1.57 and $1.58, up from between $1.53 and $1.55. The company also boosted its revenue projections and now expects annual revenue will come in between $1.782 billion and $1.785 billion.

Peters, who turns 63 next week, also announced during the conference call that he plans to retire within the next 12 months.

“I’m going to work with Jim and the board to accomplish a smooth transition in the financial leadership of the company,” he said.

Peter said he wanted to “spend more time with my family, which now includes six grandchildren, including two born in each of the last two quarters.”

Peters, who has been chief financial officer since 2004, noted that Red Hat’s annual revenue has expanded from $150 million when he took the job to nearly $1.8 billion this year.

“I’m extremely proud of what we have achieved,” he said.

Whitehurst praised Peters for being “a great partner for me and the executive team. And he has been a great part of our success. So thank you, Charlie.”

Red Hat’s earnings were released after the markets closed Thursday. Earlier in the day, its shares closed at $61.50, up $2.02. Its shares have risen 10 percent this year.